Indian Economy 2013

Survey on Current State of Economy January 2013

-2FICCI Survey on Current State of Economy, January 2013 Highlights The global economic situation continues to be difficult. Economic situation in both US and Euro area remains uncertain. U.S. gross domestic product shrank 0.1% in the fourth quarter of 2012—the worst performance since 2009. Wednesday's Federal Open Market Committee statement acknowledged that economic activity paused in recent months, but there was no change to monetary policy. Amidst this there have been visible signs of slowdown in India’s economy as well. The flagging industrial growth and exports have become serious concerns. Nonetheless, the slew of reform measures rolled out in September last year provided some support to the dwindling investor confidence and there were some signs of return in resilience. The investment activity however continues to be sluggish. Given the above backdrop and the fact that the Union Budget FY14 is around the corner, FICCI conducted a quick survey to gauge the current state of the Indian economy and understand the expectations of the industry from the forthcoming budget. The participants clearly put forth their apprehension about the current business environment in the country. A majority 77% of the respondents to the survey felt that the current business environment in the country is not favourable for capacity expansion. In fact respondents stated that investing outside India is easier and better than undertaking investments within the domestic economy. This observation was shared by about 62% of the participating companies.
Yes 23% 62% No 77% 38%

Is the current business environment favourable? Is investing outside India better than investing within the country? Will interest rate cut give a boost to investments at this juncture?

90%

10%

Source: FICCI’s Survey on Current State of Economy, January, 2013

Also, surveyed respondents almost unanimously (a 90 per cent of respondents) felt that a cut in the interest rates is essential to give impetus to investments. Similar sentiment was shared by the respondents of the recently released FICCI’s Economic Outlook Survey (EOS). ....3

-3With the Union Budget for FY14 to be announced next month, the respondents were asked to indicate their top three expectations from the forthcoming budget. Some of key demands highlighted were –  Rolling out the Goods and Services Tax at the earliest.  Giving a booster shot to infrastructure sector and capital spending.  Supporting manufacturing growth through incentives and providing for suitable fund allocation to the export sector.  Moving ahead on the path of fiscal consolidation through rationalizing subsides and bringing about some stability in direct and indirect tax (cut in excise and customs) structure.  Focus on the Agriculture and Rural sector and removing supply side bottlenecks in agriculture value chain.  Increase outlay to social sectors like health and education to take forward social inclusion agenda. The participants were also asked to point out the key impediments hindering their business performance. Most of the respondents pointed out following areas of concern to which a speedy resolution is must to create a favourable business environment:         Land Acquisition Power supply Contract Labor and unavailability of skilled labor Regulatory Uncertainty and constant intervention, excessive litigation Delay in getting environment clearances Lack of clarity and stability in taxation policies Weak Demand High cost of inputs

...4

-4Survey Background The present survey on the “Current State of the Economy” has been conducted in the backdrop of the forthcoming Budget FY14 and the persistent challenges facing the economy. The survey was conducted over the past one week and drew responses from varied focus sectors of FICCI like manufacturing, agriculture, health and education, chemical and chemical products, energy and power, medical devices et al. The responses try to capture the expectations of the respondents from the budget to be announced next month and also understand the key impediments affecting the performance of the companies. Detailed Survey Findings The survey findings clearly reflect the sombre mood of the members of India Inc. Amidst the current state of affairs with challenges impending both on external and domestic front; it seems the companies are finding it difficult to take forth their investment plans. The global economic situation remains far from being stable and this is being reflected in the prospects for India’s growth as well. Most of the macro data released off late indicates signs of moderation. The IIP growth has been languishing and exports have been in the negative terrain for eight consecutive months. Nonetheless, some key policy announcements undertaken last year did uplift the confidence levels and brought about some optimism with regard to the future outlook, but the pickup in the investment activity remains subdued. This was very clearly reflected in the present survey results with majority of respondents citing that the current business environment is not favourable for capacity expansion. About 77% of the companies said they feel that the business environment is not favourable for undertaking expansion (refer Chart1). Further, about 62% of the participating companies opined that they find investing outside India easier and better than investing within the country (refer Chart 2). ...5

-5Chart1: Is the current business environment favorable for capacity expansion? Chart2: Will interest rate cut give a boost to investments at this No juncture?
10% Yes 23% No 77% Yes 90%

Chart3: Is investing outside India better than investing within the country

No 38% Yes 62%

The RBI had been maintaining a hawkish monetary policy stance for some time now, which was finally reversed in the recently announced Third Quarter Monetary Policy Review. The Central Bank cut the repo rate and CRR by 25 basis points, and this is expected to provide some respite and support to the industrial growth. The participating companies were also asked to indicate if they feel that a cut in the interest rate by RBI will give a boost to investments at this juncture. A whopping majority of 90% indicated that a cut in the interest rate would be beneficial at this point in time (refer Chart3). In fact this sentiment was also shared by the respondents of the recently released FICCI’s Economic Outlook Survey (EOS) which is conducted amongst the prominent economists of the country. The EOS respondents had expressed need for immediate cut in repo by at least 25 basis points in the recently announced monetary policy. The surveyed economists of EOS had also stated that a policy rate cut of 75-100 basis points spread over FY14 will be critical for reviving the growth. On back of the hope of rate cut and consequent. ..6

-6positive impact on industrial growth and consumption, the EOS respondents growth for FY14. forecasted a 6.7% GDP

However, going forward it will be important to maintain a cautious approach. The hope of moving to 6.7% growth level in next fiscal would not be possible without addressing certain key challenges. The twin deficits – on current account and on the fiscal side will continue to be worrisome areas. In fact, the results of EOS indicated the average value of fiscal deficit as a percentage of GDP to be around 5.1% for FY 14, signifying that the process of fiscal consolidation will be long and arduous. Key point to be noted is that government needs to carry on reforms process on a consistent basis to sustain the growth momentum and get back to high growth trajectory. With the budget around the corner the respondents were asked to indicate their top three expectations from the forthcoming budget. Some of key demands highlighted were –  Rolling out the Goods and Services Tax at the earliest.  Giving a booster shot to infrastructure sector and capital spending.  Supporting manufacturing growth through incentives and providing for suitable fund allocation to the export sector.  Moving ahead on the path of fiscal consolidation by rationalizing subsides and bringing about some stability in direct and indirect tax (cut in excise and customs) structure.  Focus on the Agriculture and Rural sector and removing supply side bottlenecks in agriculture value chain.  Increase outlay to social sectors like health and education to take forward social inclusion agenda. The participants were also asked to point out the key impediments that are hindering their business performance. Common factors projected by majority of include:         Issue of Land Acquisition Interrupted Power supply Contract Labor and unavailability of skilled labor Regulatory Uncertainty and constant intervention, excessive litigation Delay in getting environment clearances Lack of clarity and stability in taxation policies Weak Demand High cost of inputs

Government needs to work towards resolution of these worrisome areas to give a boost to the Investment activity which has taken a major hit in last one year. Investment momentum is absolutely essential to kick start the economic growth. ******************